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Interest Rate, Inflation, and Housing Price: With an Emphasis on Chonsei Price in Korea

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  • Dongchul Cho
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    Abstract

    This paper discusses the relationship between interest rate and inflation rate on one part and the house price relative to chonsei price (up-front lump-sum deposit from the tenant to the owner for the use of the property with no additional requirement for periodic rent payments) on the other. The key point of the paper is that the relative price of sales to chonsei depends on the ratio of inflation to real interest rate, and thus even when the monetary authority maintains a pre-announced target level of inflation rate, the relative price of sales to chonsei rises if the real interest rate is lowered. This finding seems to help understand the recent hikes of the house prices despite the stabilizing chonsei prices. Recognizing this relationship, it may be sensible to lower the target inflation rate in an economy where real interest rates permanently decline, if the society wishes to reduce its adverse effect on the wealth distribution between house owners and chonsei tenants.

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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11054.

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    Date of creation: Jan 2005
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    Publication status: published as Cho, Deokho and Seugryul Ma. "Dynamic Relationship Between Housing Values And Interest Rats In The Korean Housing Market," Journal of Real Estate Finance and Economics, 2006, v32(2,Mar), 169-184.
    Handle: RePEc:nbr:nberwo:11054

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    Cited by:
    1. Sang-Wook Stanley Cho, 2007. "Accounting for Lifecycle Wealth Accumulation: The Role of Housing Institution," Discussion Papers, School of Economics, The University of New South Wales 2007-27, School of Economics, The University of New South Wales.
    2. Hoon Cho & Kyung-Hwan Kim & James Shilling, 2012. "Seemingly Irrational but Predictable Price Formation in Seoul’s Housing Market," The Journal of Real Estate Finance and Economics, Springer, Springer, vol. 44(4), pages 526-542, May.
    3. Sang-Wook Stanley Cho, 2007. "Household Wealth Accumulation and Portfolio Choices in Korea," Discussion Papers, School of Economics, The University of New South Wales 2007-26, School of Economics, The University of New South Wales.

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